Magna Entertainment reorganization plan subject to court confirmation hearing

Magna confirmation hearing begins

WILMINGTON, Del. — A bankruptcy judge began a hearing on whether to confirm horse track owner Magna Entertainment Corp.’s reorganization plan Tuesday by rejecting a shareholder request to appoint an independent examiner in the case.

Judge Mary Walrath also denied a request to appoint an official committee of equity holders, saying MEC shareholders waited too long to file their motion.

The shareholders are objecting to Magna’s reorganization plan, saying it undervalues the company and improperly allows parent company MI Developments, or MID, to acquire MEC assets to the detriment of other creditors and all remaining shareholders. The shareholders, who hold about 10 percent of the equity in MEC, stand to get nothing under Magna’s reorganization plan.

Florida regulators also have objected to the plan, saying it is contingent upon transfers of Gulfstream Park licenses to MID that are either not allowed under Florida law or won’t be approved by the plan’s proposed April 30 effective date. Florida officials also object to provisions that would discharge Magna of its license obligations if it continued to operate Gulfstream Park while MID worked to acquire new licenses.

But under cross-examination Tuesday, MID Chief Financial Officer Rocco Liscio said the provision requiring Florida regulatory approval for the Gulfstream Park licenses could be waived under the reorganization plan.

Magna’s plan also is contingent upon the proposed settlement of a lawsuit in which its official creditors committee accused MID of sham financial transactions leading up to the company’s bankruptcy filing last year. The lawsuit claimed that Ontario-based MID and its chairman, Frank Stronach, propped up Magna with equity infusions disguised as secured loans to ensure that Stronach retained control of MEC assets.

Donna Harris, an attorney for the objecting shareholders, told Walrath the confirmation hearing should be postponed so that shareholders could obtain documents supporting their argument that an independent valuation of the Magna is needed before its reorganization plan is considered.

Attorneys for Magna and its committee of unsecured creditors objected to any delay.

Magna attorney Brian Rosen argued that the company’s bankruptcy funding expires April 30, the proposed effective date of the reorganization plan.

“This is extremely sensitive; the budgets have been tailored,” he said.

But Harris dismissed the notion that Magna would lose its debtor-in-possession financing if the confirmation hearing was delayed.

“I find it very hard to believe that any financier would let this case drop just before the Preakness,” she said, referring to the second leg of horse racing’s Triple Crown, which is held at Magna’s Pimlico track in Baltimore.

Walrath denied the postponement, saying many of the shareholders’ concerns were raised by the creditors committee in its lawsuit, which claimed that Magna fraudulently transferred more than $125 million in loan payments to a subsidiary of MID in the two years leading up to Magna’s Chapter 11 filing. It sought to recharacterize MID’s loan claims as equity interests and to subordinate them to other claims.

In exchange for the lawsuit being dropped, MID has agreed to pay $89 million to holders of allowed general unsecured claims against MEC and its debtor affiliates, except the Maryland Jockey Club, whose assets include Laurel Park and Pimlico.

The plan allows MID to acquire the jockey club assets, paying about $13 million to fully satisfy secured claims of PNC Bank, which holds a lien on Magna’s Maryland horse racing assets, and about $6 million to fully pay holders of unsecured claims against the jockey club.

MID also will pay the former owners of the tracks $4 million to settle a dispute over future slot machine gambling rights at Laurel Park.

Harris, the attorney for the shareholders, said Magna has failed to put a proper value on increased slots revenue at Gulfstream and the potential impact of slot machines at Laurel Park.

But Magna CEO Greg Rayburn, noting that the company lost about $11 million last year on Maryland Jockey Club assets even though it grosses about $8 million annually on the Preakness alone, suggested the shareholders were putting too much emphasis on slot machine gambling.

“At best, slots is a Band-Aid for what is a rapidly deteriorating industry and money-losing industry,” he said.